What is Tax Loss Harvesting?

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TAX LOSS HARVESTING
The last week of the Financial Year is the time when you are more likely to interact often with your Auditor or Tax Consultant to make sure that you have completed all your transactions which can help you in saving taxes.
For Capital Market participants or Investors, one such way of saving taxes is through Tax Loss Harvesting. It helps in lowering of tax payable for the year. Tax Loss Harvesting involves a three-step process:

  1. Selling Shares or securities that were bought and which are in Loss in the current Financial Year, which results in Capital Loss
  2. Use the Capital Loss to Offset the Capital Gains which have been made in the Financial Year
  3. Buy the same shares or similar companies in the next Financial Year.
    Let us understand this with an illustration.
    Mr. A made a profit of Rs. 2 lacs in the current financial year by Buying and Selling Shares of Company X. The profit earned will be treated as Short Term Capital Gains (STCG) Tax and will attract a tax rate of 15%. So, the tax payable by Mr. A stands at Rs. 30,000
    Mr. A learned about Tax Loss Harvesting through his Tax Consultant and decided to sell his shares of Company Y and Z bought at Rs. 3 lacs at a current value of Rs. 2 lacs. He books a Short-Term Capital Loss (STCL) of Rs. 1 lac.
    The Net Tax payable because of this transaction results in a saving of Tax for Mr. A. Now, instead of paying STCG of Rs. 30,000, he is liable to pay Rs. 15,000, saving Rs. 15,000 in Taxes.
    Mr. A after the end of the Financial Year decides to buy the shares of Company Y and Z as he feels the prospects of the company are good in the medium to long term.
    A few important things to keep in mind while doing Tax Loss Harvesting:
    a. STCG can be offset against STCL, you cannot avail the benefit by adjusting Long Term Capital Loss against your STCG.
    b. Tax Loss harvesting can also be done in the same financial year as the calculation of Taxes happens on a FIFO (First-In-First-Out) basis, while it is widely done between two Financial Years
    c. In case you wish to do it between two Financial Years check the last date of settlement of pay-in and payout. For the current Financial Year, you can avail the benefit of selling till 27th March 2024 as the settlement of it happens on 28th of March, which is effectively the last trading day of FY 23-24.
    d. Always consult your CA, Tax Consultant, or Financial Advisor before executing such transactions.
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